Forecasts for Q2 GDP Report Show a Healthy but Slowing Economy

Forecasts for the second-quarter gross domestic product report show a US economy in which growth has moderated without a recession, thanks to healthy consumer spending.

While GDP growth is expected to tick up from its pace in the first quarter, economist forecasts see a growth rate down from last quarter’s above-trend gains. GDP is expected to show an increase of 1.9%, according to FactSet. If the report comes in as predicted, it will mark an improvement from the 1.4% increase during the first quarter. However, it would be a notable slowdown from the second half of 2023, when GDP rose by 4.9% in the third quarter and 3.4% in the fourth.

“We’re expecting the report to show that the economy continues to gradually decelerate,” says EY-Parthenon senior economist Lydia Boussour, who calls for a 1.8% increase in second-quarter GDP. “That’s been visible across a number of data, whether you look at the labor market [or the] consumer market.”

However, some predictions look for a more robust increase, partly due to stronger consumer spending. Economists at Goldman Sachs and Bank of America both forecast a 2.3% rate, while the Atlanta Fed GDPNow model estimates a solid 2.7%.

Q2 GDP Report Highlights

• GDP report release date and time: Thursday, July 25 at 8:30 a.m. EDT
• GDP forecast to rise 1.9% for the second quarter vs. 1.4% in the first quarter, according to FactSet

GDP Buoyed by Consumer Spending

Boussour expects consumer spending to be at 1.8%, stronger than in the first quarter but significantly lower than in last year’s second half. “We have seen a moderation in spending, and that’s been driven by lower income and younger households,” she says. Households with higher debt burdens and weaker savings buffers “have been more selective and a bit more price-sensitive.”

Boussour also expects business investments to be “on the soft side.” She explains that businesses have become more selective with their investments and hiring because of lower demand and higher borrowing costs. A difficult housing market with high mortgage rates also leads her to forecast softer residential investments.

Considering net rate, “we are looking at having another significant drag from trade that’s likely to reflect stronger imports than exports,” and that is likely to be “upset by a boost from inventories,” Boussor says. She notes that the labor market has also seen softening, with unemployment rates rising slightly in recent months.

Preston Caldwell, Morningstar’s chief US economist, forecasts real GDP growth to be about 1.9% for this quarter, in line with the consensus. However, he expects growth to cool off over 2024, down to a 1.6% rate by year-end. “The biggest thing is that we’re starting to see a more cautious attitude by consumers who have had quite low savings rates over the last two years as they sped down the excess savings they accumulated during the pandemic,” he says.

He cautions that “the GDP on a quarterly basis is fairly noisy ... if you look at the quarter-over-quarter annualized data, you see it bouncing around from one quarter to the next. So there’s a lot of statistical noise that can’t be predicted in advance.”

Recession Likely to be Avoided

Neither Caldwell nor Boussour anticipates a recession happening soon. “We continue to see a gentle deceleration, so right now, we don’t believe that there is anything alarming,” Bossour says. She thinks the economy will remain on a path of gradual deceleration, with growth continuing to fall over the next two quarters before gradually picking up in 2025. For now, “we do think the softening in the labor market and the fact that inflation is on the right track are signs that the recalibration should be starting soon,” she says.

Caldwell sees a similar pattern: “I’m expecting growth to trough in 2025, avoiding recession, but getting down to an annual average of 1.4% growth in 2025, and then [it will] start to re-accelerate after that on the back of Fed rate cuts.”

GDP Seen Giving Fed Room for Rate Cuts

Since growth has moderated and inflation pressures have eased, the Federal Reserve is now seen as likely to cut interest rates in September. “The Fed has reason enough to start cutting just based on inflation starting to converge back to normal levels. That calls for a less restrictive monetary policy than we have right now,” Caldwell says.

While the economy has been resilient to high interest rates, Caldwell says there is some uncertainty about how long it will be able to maintain that resiliency. If the Fed does not cut interest rates soon, “it could cause an abrupt deterioration in the economy in such a way that it could move quicker than the Fed can react to.” The central bank doesn’t want things to get out of its control, so “that would call for a preemptive modest loosening in policy,” he explains.

Boussour believes the softening labor market has strengthened the case for a September rate cut, and she expects a second cut in December. “The labor market has come back into balance, and we’ve seen inflation moving in the right direction. Together, these should support the Fed starting that cycle sooner rather than later,” she says.

According to the CME FedWatch tool, bond traders peg the odds of a September rate cut at nearly 92%.